It may or may not be true that some of us venture capitalists have been called 'angels'. Of course, some of us consider that we are, but we want to make sure that you don't get us confused with 'angel investors.' What's the difference? First, let's look at these so-called 'angels'.
Angel investors are individual investors who have a very high net worth and are looking for a high rate of return (ROI) through private investments in small businesses or start-ups. This group is as diverse as any investor, and is usually not tied to one modus operandi for making money. That is to say that these individuals have accrued their fortunes through various sources.
One commonality seems to be that angel investors have an entrepreneurial streak, and were likely in business and successful at it. A common scenario is the entrepreneur or executive who started a small business, grew it and then sold it (or took an early retirement); they now have the skills to play on the business field as well as the funds to invest in it.
Angel investors who have some experience under their belts tend to vet potential investments with companies that have:
- Strong management and executive teams
- Solid and ambitious business plans
- A potential for high and/or fast growth
- Technologies that the investor is personally familiar with, or in an industry / sector that they have experience with
If a start-up is appealing to an angel investor, but hasn't yet pulled together its management team, they would need to show that the necessary key positions and profiles are well mapped out. The business plan needs to be solid, and the potential for growth must clear.
The term 'archangel' is sometimes used to refer to the point person or lead investor who gets designated in cases where there is a group of investors involved. Some projects attract a flock of potential investors and they need a leader.
If you've caught onto an underlying message in this article, then you'll see that angel investors are looking for more than simply a great return on their money. They want to play, to actually have their hands in the business.
The additional roles –besides that of J.P. Moneybags- that angel investors take on can run the gamut from casual involvement with some friendly consulting, all the way to becoming the mentor that the entrepreneur (or business owner) trains under on his way to success. So, experience and knowledge of the industry or sector is just as important as how much the angel wants to play in that particular sand-box. This desire often means that the angel may be willing to trade off some ROI, or even assume a higher level of risk, in exchange for the non-financial benefits that appeal to them.
Since angel investors are looking for a great investment in the form of a personal opportunity, they will usually be experienced in the particular sector or industry of the company they vet as an investment opportunity.
Now, to the venture capitalists: these are professional investors who manage funds and seek investments that are suitable for these funds. The VCs may or may not be experienced in the particular sector or industry of a company they vet. Venture capital companies remain focused on what the potential risk versus return is.
There are many commonalities between angel investors and venture capitalists. Both sets of investors provide equity financing in exchange for a stake in the company. Both typically offer unsecured capital to burgeoning businesses that show potential for solid and fast growth. Both offer funding that covers a wide range of businesses, industries, sectors and geographic areas. Both types of investors are assuming a relatively high degree of risk in hopes of a relatively high rate of return. Both offer guidance and leadership in the form of active participation rather than mere passive investments, and both have a pre-planned end-line in sight.
Any way you look at it though, we're all angels for helping the new guy or the little guy get a leg up on his business, both financially as well as experientially. We want him to be the next success story, and we'll cheer him on along the way. Then we'll sit back and smile at his success and our risk that has paid off in spades.
